RBI Releases Draft Norms For On-Tap Licensing Of Small Finance Banks

The Reserve Bank of India has proposed to allow individual promoters, private companies and societies, small non-bank lenders, microfinance institutions and local area banks to apply for small finance bank licences. The guidelines also open a window for existing payments banks to transition, should they meet other necessary conditions for small finance banks.

According to draft guidelines for on-tap licencing of small finance banks released by the RBI, joint ventures between two or more promoter groups won’t be allowed to apply. Public sector entities, large industrial houses, non-bank financial companies promoted by large conglomerates, state finance corporations and subsidiaries of development finance institutions have also been barred.

The central bank defines large industrial houses as those with assets worth over Rs 5,000 crore, with non-financial businesses contributing to over 40 percent assets or income.

Urban cooperative banks may convert to a small finance bank through a regulatory mechanism. According to the draft norms, they must have a minimum capital base of Rs 100 crore and that should be increased to Rs 200 crore within five years of commencing operations as small finance bank.

Some of the key proposals under the draft guidelines include:

• Promoters must hold a minimum of 40 percent of the paid-up voting equity capital in the small finance bank for five years
• In case a promoter holds more than that at the time of granting the licence, the shareholding must be brought down to 40 percent within five years.
• Promoter holding must be brought down to 30 percent within 10 years and 15 percent within 15 years.
• The small finance bank may be held by the promoter directly or through a non-operative financial holding company.
• The parent may hold another financing firm, but it must ensure that it doesn’t do the same businesses as the small finance bank.
• Listing mandatory after a small finance bank reaches Rs 500 crore net worth.
• Minimum capital base required for setting up a small finance bank will be fixed at Rs 200 crore.
• A small finance bank must maintain a minimum capital adequacy ratio of 15 percent on a continuous basis.
• At least 75 percent of its adjusted net bank credit must be toward priority sector loans.
• To ensure credit flow to smaller borrowers, at least 50 percent of the bank’s loan book must be toward loans worth Rs 25 lakh or below.
• A small finance bank will be precluded from extending any credit to promoters, shareholders with more than 10 percent shareholding and to their relatives.

The banking regulator introduced small finance banks to promote differentiated banking in November 2014 to ensure credit flow to the unserved and underserved sections that don’t have access to formal banking channels. In September 2015, the RBI issued in-principle licences to 10 entities, largely microlenders and local-area banks.

Earlier this month, the RBI had put certain restrictions on Equitas Small Finance Bank for not being able to meet the listing norms within the stipulated time frame. The small finance bank will not be able to open any new branches and the remuneration for its managing director and chief executive officer will be frozen at current level till further orders.